The term free market economy mainly means a system where land and capital are privately owned and the buyers and sellers are solely responsible for all economic decisions. The free market economy is usually associated with a pure capitalist system where prices influence the allocation of goods and services. …
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The fact that a free market economy operates automatically is one of its major advantages. Moreover, when firms, consumers and workers pursue their own self interest through buying and selling in competitive markets, it helps in minimizing the central economic problem of scarcity, by encouraging the efficient use of resources (Lipsey 2003). In an actual scenario, however, markets fail to achieve maximum efficiency in the allocation of scarce resources resulting in inequality and unfavorable externalities therefore governments feel it necessary to intervene thus, in practice, perfect free market economies do not exist.
Even in countries like USA, Germany and France, which are considered to be practicing free market to a great extent, there are many areas that are in government’s control. For example, in USA, there are laws proposed to verify illegal trade practices. They also have a government department called the FDA (Food and Drug Administration) that ensures all consumer products that are taken in to the body are toxic free.
There are number of reasons as to why a free market ascends level of inequality and inefficiency in the economy. Firstly, a perfectly performing price system, as the case in a free market, does not provide for the issue of an ethical income distribution. In such a system, the limited supplies of goods and services are rationed out to those who can afford it. In other words, the scarce resources are usually diverted to the production of luxuries for the rich before an adequate output of commodities for the poor is produced. In addition, essential goods and services that are socially desirable may not be produced in sufficient amount under the price system because they are not profit yielding. These goods and services include health, education, defence, lighting, etc. This is the reason why the state provides, in most countries, for what are considered to be basic needs. Furthermore, a free market economy fails to consider all the costs and benefits associated with the production and consumption of commodities. Since they are profit motivated, producers tend to ignore the costs they impose on society as a result of their activities (Begg 1997). In this kind of economy, there is limited competition between firms. A few giant firms may control an industry, in such a case consumer sovereignty is affected; the bargaining position of consumers is weakened considerably while the sellers position is enhances resulting in higher prices and restricted output. Lack of competition and high profits also tend to reduce the incentive for firms to be efficient and resourceful. Due to the imperfection in market mechanism, market economy tends to further increase the disparities between people, that is, those with power and property gain at the expense of those without it. It also, due to its self interested behavior, tends to encourage greed, materialism and the acquisition of power (Sloman 1997). In my opinion, an economy should use the market mechanism to some extent and allow a certain degree of government intervention. Such economies are called mixed economies and all real world economies are a mixture of the two systems. Such a system proves beneficial for all the parties as it gives everyone the freedom to choose and produce while maintaining equality in the economy. 2.1 According to demand and supply analysis, there is an inverse relationship between the price and quantity demanded for a product. When the price for a product is too high, the quantity demanded eventually falls. Likewise, when price is low, quantity demanded increases. The movement along the demand curve is
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(Free Market Economy Essay Example | Topics and Well Written Essays - 1250 Words)
“Free Market Economy Essay Example | Topics and Well Written Essays - 1250 Words”, n.d. https://studentshare.org/macro-microeconomics/1390503-economics.
As the author puts it, free market economy is in total contrast to controlled market in which the government indirectly or directly controls demand, supply or prices. According to Adam Smith, the free market system supports the growth of monopolies, cartel-type activities, and mergers.
The Financial Crisis In 2008, the global market collapsed, The Bush administration figured out that only government intervention could save the companies whose failure could fetch destructive reactions. American Insurance Group (AIG) and Fannie Mae and Freddie Macare are those two giants which suffered from this crisis.
Self-interest applies to the needs of both seller and buyer in a free market. This means that the buyer has the right and desire to purchase preferable goods or services at the lowest or affordable prices. The sellers have the freedom to make profits by setting their own positive prices on the goods and services they prefer to sell.
The essay gives detailed information about advantages and disadvantages of free market economy and mixed economy systems, through the use of the real-world examples. A mixed economy permits parallel operation of private and public entities. In nations that have a free market system, financial freedom promotes high living standards and high wages.
This essay primarily focuses on the identification of the distinctive features of two most common economic system in the world. Free market is an economic system that is determined by the price mechanism. A mixed economy is a combination of a free market and planned economies. Free market economy is deemed more effective compared to a mixed type.
These two parties decide what to produce and what to purchase. A free market economy is based on the forces of demand and supply with little or minimum government intervention in the form of subsidies, taxes and regulation (Kates, 2011:34). The means of labour are privately owned and this enables parties to according to their own self-interests.
The free market economy is characterised by private ownership of property and/or resources, means of production, consumer sovereignty, competition and independent choices. The free market economy is more effective than the mixed economy due to the fact that investors or businesses and the consumers have control over the market, i.e.
The free market economy is well discussed in the following paragraphs.
A free market economy is the type of economy(Slavin, 1989) in which the resources are allocated based on the basic economic law of supply and the demand for them. But reality, this is mainly a theoretical concept because we all know that in every country ,including capitalist ones, there are import restrictions or quotas established to protect the countries' local competitors.